Ask the Expert Interview with Vanguard: Model Behavior: A Look Closer

Vanguard ’s Global Chief Economist, Joseph Davis, Ph.D., provides further details on the thinking powering the Vanguard Megatrends Model? and what other forecasters might be missing.

A large body of research already exists on megatrends, both within and outside the investing field. How are Vanguard’s approach and views different?

Joseph Davis: First, our approach is quantitative, and second, we’re not picking one or two megatrends, but instead focusing on several, individually and in relation to one another, that are likely to be very important. With this approach, we can sort through and identify which megatrends are likely to be critical, and which are likely to be more ancillary, in the presence of other megatrends.

And this approach makes our view more actionable because it allows us to simulate scenarios and likely outcomes regarding the makeup of the economy looking out over the next decade. From an investor’s point of view, that is much more helpful than narrative-driven or single-megatrend proclamations. Our research points to a future that is currently not the consensus view.

This work identifies the “technology” megatrend as having the most impact on The Big Four. Why is this the case?

It’s important to clarify what we mean by “technology”. We are talking about how it shapes the way the economy produces output and adds value as well as how it shapes labor market dynamics, the nature and magnitude of demand and supply in the labor market.

Manifested in these ways, technology is the primary driver of the trend growth for the economy and, oftentimes, stock market valuations. To use a nautical analogy, technology is the “tide”, where cyclical fluctuations and monetary policy are “waves”. In the moment, all you see are waves—which is partly why so much attention focuses on central bank moves—but what truly matters in the greater scheme of things is whether the tide is going up or down. Technology determines that.

Now, some believe that technology is going to meaningfully impact the labor market in ways that will displace the majority of jobs, a very dystopian view. Our research illuminates a different outcome with the highest probability: 80% of occupations will be meaningfully transformed by technology, not eliminated by it. We believe technology will be disruptive, not dystopian.

How are both the Vanguard Megatrends Model? and related perspectives woven into your approach to forecasting?

The model is an important tool that enables us to see things differently—a view rich in historical data, individual factors and multifaceted relationships that strengthens our conviction of where to spot important emerging trends. Many of the long-term trends in economics can be, by their nature, difficult to assess in the moment. Having a good sense of the structural drivers underpinning economic trends not only helps with formulating long-term investing strategies, but also helps to inform cyclical views. Let me give you an example—the r-star, or the neutral rate for the economy.

We’ve been saying that, since the first half of 2023, r-star is higher in large part because of the rising structural deficits in the U.S., tied to aging demographics, a view that is continuing to gain traction over the past 12 months. If you know what has traditionally driven up r-star and where to look among potential factors in today’s economic environment, this increases the odds that you can cut through the noise of what’s going on quarter-by-quarter, or even year-by-year, and spot the trend that may be changing. Having a framework to stay current on how megatrends may be shaping the economy can sharpen the way we think about the cyclical outlook.

Your first- and second-most likely scenarios for the next 10 years have wildly different outcomes. Can an investor form a strategy that takes both into account?

The article continues on page 11 of our Special Report: 'Quantifying the Future: And the Critical Role That AI Will Play'.